Celebrate tax freedom while you can

Today is Tax Freedom Day, the day when the average Australian has theoretically paid off his taxes and starts to earn money for himself for the rest of the year. So congratulations! Government this year is only confiscating roundabout a third of your income.

If this was a reason to celebrate, it’s only because most other developed countries have a much higher tax burden. The citizens of France, Germany, Britain or Italy now have to work well into the European summer to pay for their welfare states, the interest on their government debt, and their growing public bureaucracies. Compared to them, Australian is indeed a lucky country.

Another reason why some might want to celebrate Tax Freedom Day this year is because it actually comes a few days earlier than it used to. In the early 2000s, Australia’s Tax Freedom Day fell in the vicinity of 19 April.

On closer inspection, however, there are reasons to take this with more than a grain of salt. The earlier Tax Freedom Day is not the result of government spending less but a fall in tax revenue as a result of the global financial crisis.

Last year, the federal and state governments ran deficits of $59 billion. But today’s borrowing is nothing but tomorrow’s taxes. Eventually, we will have to pay the deficits government is running today.

So for an honest assessment of the real Tax Freedom Day, the deficit should be included in the actual tax revenue. This means the Tax Freedom Day for 2012 will fall a whopping 15 days later, on 20 April, putting it back to roughly where it was before the global financial crisis.

Australia is on a slippery slope of becoming more like European countries. If the government continues to spend big and finance it through deficits, the future tax burden may have to rise substantially to pay for a growing debt burden.

For now, Australians may celebrate the earlier Tax Freedom Day this year. But based on our current trajectory, let us not get complacent about the coming years.